Last week, while visiting an account in the Texas Hill Country, I along with the other customers in a local restaurant noticed that our phone emails had crashed. In addition, we were unable to use our credit cards to pay for our purchases because all the terminals in the restaurant also were also down. This was somewhat odd because the TVs and the electricity were working in this particular restaurant and throughout the town.

When I returned to my hotel, however, I discovered that this particular hotel’s TVs were down and there was no internet. Throughout the Hill Country, AT&T phones were out, including my hotel’s landlines! I borrowed a phone connected to Verizon and called home to inform my family of my situation. Even the local Walmart had lines of customers extending out into their parking lot as the retailer could only accept cash given that their credit card terminals were also down.

At 3 AM, my phone started going off. After eight hours, AT&T had gotten their system up and running again. I later discovered that someone had plowed their vehicle into an AT&T tower some 25 miles away, resulting in a 70-mile outage.

That eight-hour interval with no internet service illustrated quite clearly how dependent we have become on the internet. If you are under the age of forty, you have never lived without the internet. Those over the age of fifty can remember when, as young beer salespeople, we had to find landlines to call our offices. All our weekly reports were sent to the home office by snail mail typed out on a typewriter.

It was not until the 1990s that all of this changed. Gambrinus provided their field staff with laptops and a VMX system for calls. This voice message system predominantly enabled directives to the field for projects. In 1996, Gambrinus set up AOL account, their first email system. Even with all of this, we still did not have cell phones and all correspondence to wholesalers had to be delivered by snail-mail.

Even before cell phones, which at first, were bolted into your car, we had pagers. Of course, we all lived through the fax machine days using that old wax style paper that always seemed to curl and smell.

Today, cell phones are more advanced and powerful than computers of fifty years ago. Probably more than any one thing, the internet had as much to do with the growth of the craft beer segment as anything. Today social media is the marketing focus for the craft beers.

The recent internet outage was a reminder of just how the industry and the world have changed in the last twenty years. Most of us are lost without internet connectivity. Industry pundits continue to refer to the Millennials as the change agent in the industry, when in reality, the change is due to the technology that has been embraced by a generation who knows no other form of communication.

Schlitz died when senior management decided to maximize profits by using chemical additives that changed the flavor and look of the beer. Schlitz’s white knight was Stroh’s but the heavy debt, along with the lack of senior management leadership, led that venture to also close and sell out.

Heileman Brewing Co., under the leadership of Russell Cleary, grew to be the fourth largest brewery in the U.S. in the early 1980s. Heileman went public on the New York stock exchange, a move which eventually ended in a hostile leveraged buyout by Alan Bond. Bond-financed the buyout with junk bonds at the time.

Bond’s financial collapse led to G. Heileman filing bankruptcy in 1991. Hicks and Muse bought the firm in 1994 and then sold it to Stroh two years later. This story ends when Stroh sold part of the company to Pabst and the other part to Miller. Once again, another story of how the lack of leadership combined with heavy debt undid several very successful breweries and basically killed some previously great beer brands.

One would think that given the history in this industry, others would be aware of and learn from these obvious pitfalls. Sadly, this has not been the case. A number of small breweries have closed over the past 12 months. This is not surprising as the pundits and others have predicted this fall out for some time as these closings are not focused on just one market or state, but in all 50 states.

The recent closing and foreclosure of Green Flash Brewing Co. is the first closing that has caught many by surprise. GF was a brewery that was selling almost 100K bbls. per year. They closed two breweries, laid off 75 people, pulled out of 42 states and are now being sold off!

Many industry pubs have written about what went wrong with GF through yearly timelines. All indicate very poor senior management decisions from package sizes, flavors, and pricing. Through rapid, and what appears to be the uncontrollable expansion eastward, the brewery imploded. Management did not provide the products and packaging the consumer was looking for simply because they, management, did not listen to their people. In other words, GF was telling the consumer what to drink, not listening to what the consumers were telling them.

Is it possible that GF had another agenda? Was that other agenda to create a national growth trend and expansion to catch the eye of a potential buyer? Grow the volume and pad the numbers so that a major brewer would take notice and make an attempt to acquire GF? Why not? It has happened before!

Perhaps GF’s timing was off by five years on either side. In 2013, the craft segment was on fire, while major breweries and PE firms were kicking tires everywhere. In 2023, by focusing on their own backyard and not aggressively expanding, GF, with five more years of solid financial and volume growth, might have been in a stronger position to sell out.

Whatever GF had designed it did not work which all comes back to leadership. As they say, “you don’t lose with the same team twice.”

When Krombacher decided to export to the U.S., their target markets were New York, Chicago and LA. After appointing a New York distributor in 2011, and working through the necessary details, the brand was launched with some small success. As with many imports from other countries, the plan was to first acquire distribution in the low hanging fruit areas, (e.g. German accounts and the major liquor and chain stores).

During the rollout period, Krombacher was notified about the existence of a key retailer who owned four pub/sports bars, three of which were located on Long Island and one in Manhattan. The account featured over 40 brands on draft, mostly imports and crafts, with a number of packages. The account was one that any brewer would have loved to have had representation in.

The owner made it very clear that he was interested in putting Krombacher on tap in all four of his accounts. Not because Krombacher was Germany’s top selling beer, but because the retailer wanted new outdoor patio furniture for all of this accounts. If Krombacher so agreed, payment for the furniture would have been made payable to the retailer’s marketing company. In return, the beer would stay on draft for one year in all four accounts.

This was an example of a classic retailer pay-to-play scenario. One must wonder, with the number of other brands on tap, what this retailer charged other breweries for putting their beer in his accounts. By leveraging such keg boxes, glassware, furniture, cash, etc. this retailer could have put himself in business by leveraging the breweries.

This is just one example of a retailer leveraging his bars against brewers who are willing to do whatever it takes to gain distribution and exposure. As the industry knows, this type of deal-making is in all states, and given the number of crafts and imports, retailers are saying “why not take advantage of these opportunities?”

For several months the TTB, along with the state of Florida, has been investigating illegal activity by brewers and importers in that state. While there has yet been no official announcement, one medium-size importer was fined by the TTB for buying-off retailers in that state. The initial fine was in excess of seven figures. Lawyers are working to negotiate the amount of the fine and the industry will soon know.

The TTB continues to expand their investigations into other states as well. The agency is teaming up with state agencies in California, Colorado, Nevada and New York. In the coming months, the TTB plans to announce all fines and offending companies involved. It has been rumored; however, that prior to mitigation, the total amount of the fines could be more than $30 million.

It is a good bet that those companies who are fined range from small crafts to much larger breweries. It is also a good bet that the fines leveraged will be sizably substantial to ensure violators are served up as examples of these unethical and illegal business actions. Given the difficulty of obtaining distribution, crafts and importers will continue to work around the system using whatever means they can to gain distribution. Retailers know this and will use that knowledge for their own interests.

Perhaps the TTB or the CBC leadership should speak to this issue at the upcoming convention. But will it make any difference if they do voice their concerns?

Constellation Beers’ 2018 numbers are nothing short of remarkable, especially considering the state of the rest of the beer industry. Constellation’s beer business grew depletions by 9.8% for the year; shipments were a step behind, up 8.8%.; and net sales grew by double digits, up 10.1%. Overall, Constellation’s operating income was up 19.8%.

Beer Business Daily reported the following statistics for Constellation Beers’ Q4, the three months ending February 28th: depletions, shipments, net sales and operating income were all up double digits. Depletions were up 11%; shipments were up 10.2%, and net sales and operating income were both up 11.9%.

What is even more remarkable is the fact that Constellation announced a long-term goal of 600 million cases in total, or the in-house defined goal of 2-2-1-1. This translates into 200 million cases of Corona and its line extensions, 200 million cases for Modelo, 100 million cases of Pacifico, and 100 million cases of their crafts and other beers. This includes growing 94 million cases in the next three years.

Constellation was driven by traditional marketing as they increased their marketing spending, new product development, and expansion of their other breweries into Obregon, Sonora by $900 million dollars.

All this growth has created 70 distributors in the Constellation gold network that have sold over one million cases of their brands! Constellation has eight distributors with over a 30% share. What is more remarkable is that ALL of the Constellation distributors grew in 2017 and half of the distributors grew at double digits!

It is generally accepted that the industry has three distinct networks: the red, or the AB network; the blue, or the MC network; and now the gold, or the Constellation network. The red and blue networks are struggling in comparison to the performance of the gold network.

More distributors in the blue network also sell the gold portfolio. This is due to the fact that a great majority of the red network opted not to acquire the gold portfolio during the years when AB distributors were exclusive to AB. Hindsight is 20/20.

The question is: what will this gold network look like in the future? Consider what will happen if the gold network achieves its growth targets. Will those distributors who have the gold portfolio be known only as a gold distributor? Will their MC or AB portfolio be “just another vendor” if the gold brands represent 50%+ of the market or an even a higher percentage of the distributor’s overall volume? How will a much smaller AB or MC view and handle such a situation?

What would occur in the MC and AB houses if Constellation’s sales stall or slow dramatically in the upcoming years? Perhaps a more pressing question would be, if the above happens, how will Constellation handle the situation? Will Constellation approach their distributors as Schlitz or AB did 50 years ago, ensuring the distributors make the decision to go exclusively with the gold network and sell the other brands? Or will they sell Constellation to an exclusive distributor?

Today the gold network and Constellation Brands will work toward these goals as their sales and profits continue to exceed expectations. As with all brands, however, there will come a time when the upward trend will come to an end. Those gold distributors should consider the future as it is just around the corner. Let’s hope Constellation sees it, too.

As discussed in past articles, when I took over the Schlitz operation in 1981, the territory included a number of counties in far south Texas. Three of these counties did 95% of the volume. In those counties, I had nine wholesalers competing within the same area: one Budweiser, one Miller, two Coors, two Lone Star, one Pearl/Imports, one Hamm’s/imports, and Glazers, who only had Heineken.

In the early 1980s, Schlitz held a +40% share of the volume which created a great deal of competition for the remaining 60% of the business. Economic setbacks which occurred during the period made for an even more challenging marketplace. Mexico had a major peso devaluation, oil embargos devastated the area, a region-wide freeze literally killed the citrus industry, and finally, Stroh’s purchased Schlitz. The entire South Texas market shrank as unemployment rocked to 50%, all of which combined to drive distributor consolidation at a much-accelerated rate as compared to other U.S. markets.

Fast forward to early 2000, and there were only two distributors left in the South Texas market: the AB house, which now has a number of other brands and the MC house, now owned by Glazer’s beer division. There is also a small craft distributor operation owned by Ben E. Keith.

Those key brands distributed by nine different wholesalers in the 80s are now housed in only two distributors. This scenario is similar to other areas of the U.S., as brewery consolidation, along with the need for wholesalers to eliminate costs, has driven the industry in this position of consolidation.

Craft breweries have, for years, been upset at their inability to get to market in addition to the lack of focus by the distributors on their products. Yet every year the industry continues to lose volume. Pundits target ineffective marketing, changes in demographics and aggressive marketing by the wine and spirit industries as reasons for the decline in beer sales. In last week’s post, we noted the industry’s use of dollar growth as a major performance measurement versus volume growth as a measurement, which has been the standard in the past.

Pundits purport that for a craft to grow and survive the craft has to remain local and concentrate their resources in their backyard, and not expand into other states. Such pundits site lack of resources by small breweries and their need to concentrate their business locally. These decisions are controllable by the small breweries.

A case can be made, however, that all of the industry consolidations have created a lack of in- market competition. Consolations, along with the elimination of a vendor assigning brands to several wholesalers (example: how G. Heileman operated in the 1980s) necessitates that in order for a brewery to grow, said brewery must create a model which forces it to fulfill the role of a wholesaler’s sales team. In reality, this drains resources that could be used for marketing and above-the-line media spending.

For a wine and spirit wholesaler to grow without franchise protection, those companies have to execute against specific goals. For breweries to grow, the brand building falls on the breweries shoulders’ to survive, something that is easier with a brewery taproom as its anchor.

Consolidation to the point of monopoly has never served the consumer – ever.